Explanatory Memorandum(Circulated by the authority of the Treasurer, the Hon. John Dawkins, M.P.)
Chapter 2 - Deductions and rebates for personal superannuation contributions
- To replace the existing deduction and rebate
- arrangements for employees who have employer
- superannuation support with a new rebate.
- To expand the concept of a substantially self-employed person so that people who are substantially self-employed do not lose access to tax deductions for their personal superannuation contributions because they perform small amounts of paid employment through which they receive employer superannuation support (whether under an industrial award or not).
- To clarify the circumstances in which a person is an eligible person and therefore entitled to a tax deduction for personal superannuation contributions. The definition of eligible person will be modified so that it more effectively identifies people who have no employer superannuation support (including former employees and employees who have opted out of their employer superannuation schemes).
- To ensure that a payment of superannuation guarantee charge (SGC) counts as employer superannuation support in the year for which it is payable.
Date of effect: Apart from the amendment described below, all the amendments proposed by the Bill are to apply to contributions made on or after I July 1992 [Subclause 17(1)].
The amendment to paragraph 221YAB(1)(a) applies to the calculation of provisional tax (including instalments) payable in respect of income of the 1993-94 income year and subsequent income years [Subclause 17(2)].
Income tax deductions are available to eligible persons (defined in subsection 82AAS(2) of the Act for their personal superannuation contributions to complying superannuation funds.
An unsupported eligible person (defined in subsection 82AAS(1)) is:
- a self-employed person or an employee without employer superannuation support, i.e. a person for whom there is no reasonable expectation that superannuation benefits would be provided by someone else (usually an employer) on retirement or for the person's dependants on death; or
- a substantially self-employed person, i.e. a person who derives less than 10% of his or her assessable income during the year from employment providing industrial award superannuation, that being the person's only form of employer superannuation support.
A supported eligible person is:
- a person for whom there is an expectation of superannuation benefits from someone else on retirement or death but where the expected superannuation benefits would be attributable solely to contributions made under an industrial award-based superannuation agreement.
Under the Superannuation Guarantee (Administration) Act 1992 (the SGC Act) employees may receive increases in their minimum level of employer-financed superannuation that may or may not be incorporated into industrial awards. If no amendments were made to the current law, an employee's entitlement to tax concessions for personal superannuation contributions would depend on whether or
not the employer superannuation support is incorporated into an award, irrespective of the level of that support.
To prevent that anomaly, the proposed amendments abolish tax deductions currently available to supported eligible persons for their personal superannuation contributions.
Unsupported eligible persons will continue to be eligible for tax deductions. Low to middle income employees with employer superannuation support will be eligible to claim a rebate for their personal superannuation contributions.
The current rebate arrangements are complicated and place an administrative burden on superannuation funds. The proposed amendments replace those complex arrangements with a rebate available to all people earning under $31,000 a year who cannot claim a tax deduction for their superannuation contributions.
Replacing the existing rebate arrangements with a new rebate requires a number of consequential amendments to the Act (discussed below).
Since the introduction of the SGC Act, substantially self-employed people may receive employer superannuation support other than under an industrial award. Therefore the proposed amendments extend the concept of a substantially self-employed person by omitting the requirement that the employer support from the paid employment be restricted to industrial award superannuation.
There has been some confusion as to the application of the eligible person test in subsection 82AAS(2). The amendments clarify the test by indicating that the test of what is reasonable to expect would happen on retirement or death does not require an evaluation of the likelihood of the relevant person's death or retirement during the particular year of income.
A further amendment is necessary because income and accretions on employer superannuation contributions already made are currently within the meaning of superannuation benefits. Therefore, former employees and employees who no longer receive employer superannuation support may not be eligible persons if they have accrued superannuation benefits attributable to previous employer contributions. The proposed amendments ensure that these people come within the definition of eligible person if they are genuinely unsupported.
SGC may be paid in respect of an employee in lieu of direct employer superannuation support. The proposed amendments ensure that payments of SGC will count as employer superannuation support in the year for which it is payable. Therefore, unless they qualify as substantially self-employed persons, employees for whom SGC is paid will not be eligible persons.
An employee with only industrial award superannuation support is an eligible person because subsection 82AAS(2A) excludes benefits attributable to industrial award superannuation from the meaning of superannuation benefits in subsection 82AAS(2). The Bill proposes to omit subsection 82AAS(2A). The effect of that is all employees (apart from substantially self-employed people) with any form of employer superannuation support will be denied access to deductions for their personal superannuation contributions [Subclause 7(1)].
Omission of subsection 82AAS(2A) means that a number of definitions in subsection 82AAS(1) of terms which appear in subsection 82AAS(2A) are no longer required. Therefore
the Bill proposes to omit those definitions from subsection 82AAS(1). However, because they are relevant to Part IX of the Act, the definitions are to be placed in subsection 267(1) [Subclause 7(1) and Clause 16].
Also, since the omission of subsection 82AAS(2A) removes the distinction between supported eligible persons and unsupported eligible persons, the Bill proposes to:
- omit the definition of unsupported eligible person in subsection 82AAS(1) [Subclause 7(1)]; and
- remove the deduction limit in subsection 82AAT(2) applicable to supported eligible persons so that, from 1 July 1992, all eligible persons will be entitled to a deduction up to the limit currently applying to unsupported eligible persons [Clause 8].
The deduction limit for eligible persons in subsection 82AAT(2) is determined by reference to regulation 12A of the Income Tax Regulations. The Regulations in force prior to these amendments are to continue to apply to subsection 82AAT(2) after its amendment so that the limit specified in regulation 12A applies to the amended subsection [Clause 29].
The Bill proposes to repeal the current rebate provisions and insert new section 1595Z providing a new rebate [Clause 9 - new section 1595Z].
Subsection 1595Z(1) allows a rebate for eligible personal superannuation contributions made by people who are not entitled to a tax deduction for their contributions. Eligible personal superannuation contributions are superannuation contributions made to a complying superannuation fund to obtain superannuation benefits for the person or, in the event of the death of the person, the dependants of the person.
The rebate is 10% of a person's eligible personal superannuation contributions, subject to a contributions limit of $1,000. That limit is reduced by 25 cents for each
dollar by which the person's assessable income for the year exceeds $27,000. Therefore the rebate is not available to people whose assessable income for the year is $31,000 or more.
An employee earning $24,000 a year makes personal superannuation contributions to two complying superannuation funds as follows:
- $700 to Fund A
- $500 to Fund B
The rebate allowable for the contributions is 10% of the lesser of:
- the total contributions to both funds ($1,200); and $1,000
- Therefore the rebate is 10% of $1,000, i.e. $100.
Unlike deductible contributions made by eligible persons, rebatable contributions are not taxed in the superannuation fund. They also form part of the contributor's undeducted contributions, even though the contributor has received a tax concession for them.
Rebatable contributions, like undeducted contributions, will not be subject to preservation in the superannuation fund.
The complexity of the current rebate provisions provided scope for tax avoidance. To prevent that, Part IVA of the Act specifically addressed schemes entered into with the sole or dominant purpose of obtaining the rebate.
The new rebate arrangements are simple and not open to abuse in the same way. Therefore it is unnecessary to provide references to the new rebate provision in Part IVA and the present references to the current rebate are to be omitted. [Clauses 10-13]
The Bill also proposes to amend paragraph 221YAB(1)(b). Section 221YAB specifies the conditions to be met for provisional tax to be raised on salary or wages. One of the conditions is that the amount calculated according to the formula
(Notional gross tax - Qualifying rebates) - PAYE deductions
is $3,000 or more. The new rebate is to be a qualifying rebate for these purposes. Therefore the Bill proposes to amend the qualifying rebates definition by inserting a reference to the new rebate provision. [Clause 14]
Finally, the record-keeping requirement provided in subsection 262A(4A) relating to elections made in respect of the current rebate is to continue to apply where that rebate has been claimed. Therefore the Bill proposes to amend that subsection to save the law relating to record-keeping as it applied immediately before these amendments. [Clause 15]
There is no record-keeping requirement in relation to the new rebate.
Currently, a substantially self-employed person who receives employer superannuation support from small amounts of paid employment is an eligible person only if the employer superannuation support is provided under an industrial award-based superannuation agreement.
The Bill removes the requirement that the person's employer superannuation support be restricted to industrial award superannuation. That is achieved by excluding certain superannuation benefits from subsection 82AAS(2). The superannuation benefits excluded are those attributable to eligible employment (continuous or periodic) undertaken by people whose assessable or exempt income from that employment is less than 10% of their assessable income for the year. [Subclause 7(1) - new subsection 82AAS(3)]
Eligible employment is to be defined in subsection 82AAS(1). It encompasses people who are within the extended definition of employees in section 12 of
the Superannuation Guarantee (Administration) Act 1992 (the SGC Act). It also covers people engaged in work of a domestic or private nature for 30 hours a week or less (who are not employees for the purposes of the SGC Act: subsection 12(11)). [Subclause 7(1) - new definition in subsection 82AAS(1)]
A person's income for the purposes of the substantially self-employed person test includes both assessable and exempt income. Assessable income is gross income before any deductions are claimed. It includes salary or wages and income from other sources (for example, interest income and gross rent). Exempt income is income not subject to taxation.
The concept of a substantially self-employed person also encompasses someone who, during the year of income, receives employer superannuation support but does not receive assessable income from the employment to which the support relates. That may happen if an employee resigns just before the end of an income year and the former employer makes a contribution to a superannuation fund in arrears in the following income year for the former employee's benefit.
Superannuation benefits attributable to a person's employment will be excluded from subsection 82AAS(2) in each year the person is a substantially self-employed person. If a person ceases to be substantially self-employed during a year (because income from employment rises, or because other income falls) the superannuation benefits attributable to the person's employment will be superannuation benefits for subsection 82AAS(2) purposes. That is the case even though the person may remain in the same employment and, in previous years when the person was substantially self-employed, superannuation benefits attributable to that employment may have been excluded from subsection 82AAS(2).
Lucinda is a self-employed lawyer who is a part-time director of Small Pty Ltd (her directorship is eligible employment for the purposes of new subsection 82AAS(3)). Lucinda's assessable income for the year is $50,000 comprising:
- $36,000 from her legal practice;
- $10,000 rental income; and
- $4,000 director fees.
She incurs deductible expenditure relating to her rental income so her taxable income for the year is less than her assessable income.
During the year Lucinda contributes $5,000 to a complying superannuation fund. Small contributes $2,000 to the fund for her benefit.
Lucinda's assessable income for the year from Small is less than 10% or her total income. Therefore she is a substantially self-employed person, i.e an eligible person. Note that Lucinda's taxable income is not relevant to determining her status as a substantially self-employed person.
As an eligible person, Lucinda is entitled under subsection 82AAT(2) to a tax deduction of the lesser of:
- $3,000 plus 75% of the excess of her contributions over $3,000 (a total deduction of $4,500); and
- the amount of contributions required to fund a benefit equal to her reasonable benefit limit.
If, in the following income year, Lucinda's director fees were $6,000 instead of $4,000, but the income she received from other sources was the same, she would not be a substantially self-employed person (because her employment income would be more than 10% of her assessable income for the year). In that case the superannuation benefits attributable to her employment would not be excluded from subsection 82AAS(2) and Small's superannuation contribution for her benefit would mean that she is not an eligible person and would not be entitled to a tax deduction for her own contribution.
The Bill proposes to amend paragraph 82AAS(2)(a) by replacing 'upon retirement' with 'in the event of the retirement of the relevant person'.
The purpose of this amendment is to indicate that, when considering whether in relation to a particular year of income it is reasonable to expect that superannuation benefits would be provided for a person on death or retirement, it is necessary to consider what is reasonable to expect would happen based on the premise that death or retirement has occurred. The test is an objective one which does not require an estimation of the likelihood that death or retirement would occur during the year (which was the test employed in FC of T v McCabe 90 ATC 4968). [Subclause 7(2)1
Former employees and employees no longer receiving active employer superannuation support may be disentitled from eligible person status by income or accretions arising from previous employer superannuation contributions. That is because, although such income or accretions does not come within subparagraph 82AAS(2)(b)(i) as being benefits attributable to superannuation contributions, the income or accretions does come within the terms of subparagraph 82AAS(2)(b)(ii) (Case S72 85 ATC 523).
To prevent that, the Bill proposes to insert new sub-subparagraph 82AAS(2)(b)(ii)(D). This will ensure that, with one exception, benefits attributable to income or accretions on employer superannuation contributions made in previous years are not superannuation benefits for the purposes of subsection 82AAS(2). [Subclause 7(2) - new subsection 82AAS(2)(b)(ii)(D)]
The one exception is when, in relation to particular employment, there is a reasonable likelihood that further employer contributions will be made in subsequent years of income which will prevent the employee being an eligible person. In this context, there is a reasonable likelihood of something happening if it is more likely than not to happen.
The purpose of the exception is to ensure employees are correctly identified as having employer superannuation support in a particular year if the employer refrains from making a contribution in the year (i.e. takes a 'contributions holiday') because of adequate provisions made in previous years (to the extent that this is possible after the introduction of the SGC Act), or because the employee takes an extended period of leave without pay.
However, not all future superannuation support will bring an employee or former employee within the exception. For instance, an employee may become substantially self-employed but intend to undertake small amounts of paid employment with his or her previous employer through which superannuation benefits will be received. In such a case, income or accretions on accrued benefits will not prevent the person being an eligible person if there is no reasonable likelihood that the income attributable to the employment will be 10% or more of the person's annual assessable income.
The reason for that is because, if the income from the employment is less than 10% of total assessable income, the subsequent contributions by the employer will not themselves prevent the former employee being an eligible person (because of the substantially self-employed arrangements).
Giant Co. has a superannuation scheme for its employees funded by annual contributions to a superannuation fund. During the 1991-92 income year it is calculated that the fund's assets exceed the present value of the members' entitlements. Therefore Giant does not make a contribution during that year for its employees.
- Oscar, an employee, makes a contribution during the income year to a superannuation fund. Even though Giant does not make a contribution in that year, Oscar is not an eligible person if superannuation benefits have accrued during the year on contributions made by the company in previous years. That is because it is reasonably likely that the company will make contributions in later years.
- If Oscar resigns and sets up his own business in the 1991/92 income year, he will not be prevented from being an eligible person by the income earned on his accrued benefits. That is because it is reasonably likely that no further contributions will be made for his benefit by his former employer.
From the 1992-93 income year, an employer who does not provide sufficient superannuation support directly will be required to provide superannuation support by means of the SGC.
If an employer pays SGC, the shortfall component of the charge in respect of an employee (broadly, the amount by which the employer's actual superannuation support during the year is less than the required minimum support plus a nominal interest component) is applied by the Commissioner of Taxation according to one of the following provisions of the SGC Act:
- section 65 (payment of the shortfall component to a complying superannuation fund nominated by the employee);
- section 66 (payment direct to an employee who has retired due to illness); or
- section 67 (payment to the personal representative of a deceased employee).
To ensure the SGC superannuation support will be treated in the same way as direct superannuation support, the SGC is deemed to be paid during the year for which it is payable under section 46 of the SGC Act (i.e. the year during which the employer's superannuation support was less than the minimum required). Therefore, subject to the substantially self-employed person exemption, the employee is not an eligible person during that year, even though the employer does not pay the SGC until the subsequent year. [Subclause 7(2) - new subsections 82AAS(4)-(6)]
If it is not reasonable to expect that the SGC will be paid (e.g. because the employer is insolvent), then the employee may be an eligible person under subsection 82AAS(2).